S&P Upgrades Ukraine's Rating

The credit rating agency Standard and Poor's has upgraded Ukraine's credit rating from 'selective default' due to a recent restructuring.

The agency stated that this upgrade of Ukraine's sovereign rating in foreign currency from 'SD' to 'B-/B--' is deemed 'very speculative,' yet still leaves the door open for future borrowing abroad.

It is noteworthy that S&P downgraded Ukraine's rating to selective default on September 25. At that time, the country was undergoing painful negotiations with commercial creditors aimed at easing the debt burden and obtaining a rescue package of financial assistance from the IMF.

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'The upgrade of the ratings to 'B-' reflects the gradual implementation of reforms by the government that support tax, financial, and economic stability, along with improvements in some external indicators of Ukraine, including an increase in international reserves,' noted Standard and Poor's.

Nevertheless, Ukraine's rating is still classified as 'junk.'

The Poroshenko government believes it is trapped between growing public discontent due to austerity measures and dissatisfaction from the IMF due to the slow pace of fighting corruption and bureaucracy.

The rating update may temporarily boost investor sentiment and give the Poroshenko party more confidence in strong positions for the local elections in Kyiv scheduled for October 25. However, Ukraine's inability to resolve the conflict in Donbas or fully comply with the peace agreement with Russian-backed militants in the east complicates economic forecasts and makes them uncertain and risky.

Ukraine's Finance Minister Natalia Yaresko acknowledged last week that the IMF is likely to disburse only one of the two tranches of $1.7 billion that Kyiv had hoped to receive by the end of the year. Representatives of the IMF will arrive in Ukraine after the local elections.

Ukraine is also in a difficult financial position due to unpredictable reactions from Russian President Vladimir Putin. Putin remains visibly upset about the ousting of President Yanukovych last year. It is known that Putin's sovereign fund extended a $3 billion loan to Yanukovych's government in appreciation for his refusal to sign a landmark political association deal with the EU in 2013.

Poroshenko's team believes this loan was Putin's 'bribe' to keep Ukraine in Russia's geopolitical orbit. Moscow has refused to join negotiations for debt restructuring and thus considers Eurobonds a sovereign loan that must be repaid by December 20. Kyiv, in turn, has no intention of repaying this money.

S&P indicated that the possibility of default in Ukraine due to non-repayment of this loan to Russia should be taken seriously.